Monday, March 2, 2009

Is the Government Spending Taxpayer Money?

Who loses when the government wastes money?

Certainly not the past taxpayers or current taxpayers -- that money is a sunk cost. Maybe future taxpayers lose (nobody knows for sure who these people will be) if government officials try to remedy unhealthy deficits with future tax rate hikes.

But unhealthy deficits can instead cause future government spending and transfer payments to fall, or if government policies remain unchanged, cause the value of the dollar to drop. In the former case, beneficiaries of government spending and transfers (e.g. retired people, low-income people, or industries with powerful lobbies) will suffer. In the latter case, holders of finanical wealth in dollars will lose out. The big holders of dollar financial wealth, by the way, include large foreign holders of treasuries like foreign central banks and sovereign wealth funds.

I am not arguing that government waste doesn't have negative consequences -- it does, and waste should be avoided. But the losers include everyone except the direct beneficiaries of that waste. Past and current taxpayers do not have any special direct exposure to the negative consequences of waste, and probably not future taxpayers either. Given the tremendous political pressure not to reduce spending or to raise taxes significantly, it can be argued that the biggest direct losers of unhealthy deficits are entities with significant net wealth exposed to the value of the dollar. That is, wealthy people, who do not necessarily have a lot of taxable income, and foreign governments, who do not pay US income taxes at all. The winners are government employees, those entities with Washington connections, and people and companies which have negative financial net worth.